Fat Cats and FATCA: A Warning for Retirees

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    As Albert Einstein once said about filling out tax returns, “This is too difficult for a mathematician. It takes a philosopher.” But philosopher or not, everybody knows it’s that swell season of the year again, with only a month to go before the United States IRS tax filing deadline of April 15th. And yes, even if you are living in another country such as Costa Rica, you are still obligated to file a tax return and pay any taxes due.

    Let me say right off the bat: I’m no tax attorney, accountant or CPA. I don’t even do my own taxes; my long-suffering husband Layne some years ago created his own amazing Excel spreadsheet, with named ranges duplicating IRS forms, all interconnected to other ranges, representing everything from the basic 1040, to Form 8829 for Business Use of Home and on to that slippery Schedule C for Profit or Loss from Business. Now semi-retired here in Costa Rica, our tax returns are much simpler but Layne still updates his spreadsheet each year with new tax information and calculates our tax obligation himself.

    Even for the mathematically adept like Layne, if not Einstein, tax time is never much fun. One consolation for those of us whose primary source of income is Social Security is that at least the process of doing taxes is now less onerous than in our glory years. For those with higher or more complex income sources or greater financial assets, understanding and complying with the tax code can be a daunting task. That is especially true this year because the new Foreign Account Tax Compliance Act (FATCA) took effect for the 2011 tax year. If you hold significant funds in a foreign bank account, possess other foreign financial assets or have income here in Costa Rica (or other overseas locales), you should hie thee to a good tax attorney because the penalties for failure to adhere to this new law are draconian.

    In fact, the penalties may be the worst part of it for taxpayers since the law only requires that you “report.” The new reporting requirements occupy a straight-forward two-page form but the fines for failure to file that form, if you meet the reporting threshold, can add up to tens of thousands of dollars. Even for inadvertent noncompliance, the base penalty is $10,000 for the taxable year; if you knowingly continue in noncompliance, the penalty goes up in additional $10,000 increments for each 30-day period, up to a maximum of $50,000! Clearly, this is not a law you can afford to ignore.

    If you’re wondering whether this new law applies to your situation, here are the thresholds for reporting for those of us who are U.S. taxpayers living abroad (other rules apply to U.S. taxpayers with overseas holdings, but who reside within the U.S.):

    • You are filing a return other than a joint return and the total value of your specified foreign assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the year; or
    • You are filing a joint return and the value of your specified foreign asset is more than $400,000 on the last day of the tax year or more than $600,000 at any time during the year.

    (From IRS website:,,id=251217,00.html)

    This suggests that if you came to Costa Rica, set up a corporation through which you bought a house for $300,000, own a car or perhaps run a business, you may be subject to this law.

    Layne and I learned about FATCA from Sharon Wildey, a retired litigation attorney and the Costa Rica country representative for Americans Citizens Abroad, a 30-year-old non-profit, non-partisan organization which studies, educates and advocates for the interests of Americans living overseas. According to Ms. Wildey, who spoke at a recent meeting of Democrats Abroad Costa Rica, FATCA represents an effort by the U.S. government to avoid future offshore banking tax scams like the UBS case from 2009, in which Swiss bank UBS admitted to a conspiracy to defraud the Internal Revenue Service by concealing bank accounts owned by wealthy Americans, some with as much as $150 million in them. But in its effort to catch such tax-evading millionaires, the new law snares innocent citizens of more modest means in its wide net. Not only that, but the law seems to assume U.S. taxpayers are all dishonest and deals with overseas taxpayers as “guilty until proven innocent,” rather than the other way around as is the rule in U.S. jurisprudence.

    One particularly disturbing aspect of FATCA is the reporting obligations it places on foreign financial institutions, or FFI’s. The provisions cover banks, stock brokers, hedge funds, pension funds, insurance companies and trusts and beginning in 2013 requires them to report directly to the IRS any of their clients who are U.S. persons. These reporting requirements include providing the IRS with the name and address of each client, the largest account balance they have held during that year and the total debits and credits of any account owned by a U.S. person. The penalty on the FFI for noncompliance is a 30% withholding tax on all of its transactions. An ACA analysis says such a burden on FFIs could result in those companies refusing to do business with Americans living overseas or American companies doing business overseas, in order to avoid the reporting requirements. According to Ms. Wildey, this is already happening.

    Another tax law of interest for overseas taxpayers is known as FBAR, for Foreign Bank and Financial Accounts, which has an unusual filing deadline of June 30th. The FBAR rule went into effect in March of 2011 and has a much lower threshold for reporting: persons with a “financial interest in, or signature authority over” a foreign account (or combined accounts if more than one) having a total value of $10,000 at any point during a given year. Penalties for failure to report such accounts begin at $10,000 per occurrence or 20% of the value of their bank account, whichever is higher. FBAR is another law you would not want to ignore.

    Hopefully, I got your attention with this brief summary of these two tax laws directed at expats. My purpose is to encourage you to consult with a qualified professional who has a solid understanding of U.S. tax laws and can help you wade through the complex regulations to determine your own liability under the law. Failure to do so could put a real financial damper on your retirement.

    Kat Sunlove blogs about life as a retiree in Costa Rica at

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